Buy, Sell or Hold: After a 950% Run, Is Under Armour Overheated?

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When was the last time you sat in the stands at a local high school or grade school ball game?

If you did, it would be impossible not notice all of the kids decked out in Under Armour Inc. (NYSE: UA) gear.

Based in Baltimore, Md., Under Armour is one of the fastest-growing brands in the country with a 60% share of a $3 billion dollar market.

A leader in synthetic performance apparel, the company has built its reputation by delivering high-quality, technologically advanced clothing that keep athletes cool, dry and light.

More importantly, it has taken the current vogue generation by storm as something cool, cutting-edge and a must-have for a "serious" athlete.

But is Under Armour just "the latest thing" or "must-have" for your portfolio as well?

Let's take a look….

Under Armour's Big Stats

The good news for investors in Under Armour's financial results is quite astounding.

For the first quarter of 2013, the company saw net revenues increase 23% to $472 million from the year-ago quarter, and it is forecasting revenues of $2.21 billion for the current year – up 21% from 2012. Strong sales were primarily driven by a line of new base-layer products (the inner layer that draws sweat away from the skin) and fleece.

Under Armour is also putting an emphasis on sales through direct-to-consumer channels such as factory stores and e-commerce, which yield much higher margins compared with wholesale customers such as Dick's Sporting Goods (NYSE: DKS). In 2012, the direct-to-consumer segment accounted for 29% of the overall revenues. This is bound to increase since the company plans to open 10 factory house stores and up to two specialty stores in 2013.

Under Armour is growing much like many hot apparel brands we've seen through the years. It is following the typical pattern of fast growth, rapid distribution, product-line expansion and direct-to-consumer stores.

But now Under Armour is about to embark on the next phases – international growth and new apparel categories.

These new phases are where Under Armour is going to face some of the most dominant names in sports apparel – Nike Inc. (NYSE: NKE) and Adidas.

Room to Grow Even Bigger

Currently, only 6% of Under Armour's sales come from international sales.

But the company has plenty of room for growth if it plans to emulate Nike, which derives 58% of its revenues from overseas. Even so, it will be quite an uphill battle.

Under Armour's current plan is to open stores in Asia and Europe while at the same time increasing its brand recognition through partnerships with popular sporting leagues. Under Armour has a sponsorship deal with one popular English soccer club, Tottenham Hotspur, but still has a long road ahead, especially in the globally popular sport of soccer.

However, Under Armour did make a shrewd move by becoming the Olympic sponsor for USA Gymnastics through the 2020 games. Not only will that give the company a global stage, but it will also increase brand awareness – specifically among, women which is part of a larger goal.

Here's why: In 2012, Under Armour's women's business accounted for only $400 million, while men's business accounted for $1.8 billion.

So Under Armour is now in the process of improving its brand image with women by making the shopping experience (online and in the factory stores) more female-friendly and by offering styles catered more toward a woman's preferences. To that end, Under Armour is on the right track since its sales of Armour bras and leggings have become very popular.

The key now is for the company to continue to put more emphasis on its women's line of apparel and equalize the sales of both the men's and women's lines of clothing and accessories.

New Apparel Categories

Another area Under Armour is working to grow is the footwear segment.

Footwear revenues came in at $238 million for 2012. But Under Armour's share of this market is only 2%. Meanwhile, Nike is far and away the leader in the field with a 60% market share.

Under Armour's plan is to continue to rapidly grow in this area and it is making a push into new shoe categories such as basketball and running.

My concern here is simple: Will the high-tech clothes translate into high-tech shoes where Nike is still the forerunner? I think this may be a case where the hot and popular apparel is just translating into hot and popular shoes without any new technological superiority to them.

Currently, Under Armour is quickly and successfully evolving out of being strictly a synthetic apparel clothing maker to a general sportswear clothier that includes the use of more cottons and fabrics. However, the next stage in its evolution is to address the much larger market of active or casual wear, which incorporates clothes that are less for sport and more for style and comfort.

This is a tricky arena since it would be entering an area led by the deep pockets of Nike, Adidas and even Hanes' Champion Brand. Name recognition, brand allegiances, fashion and the "cool factor" are more at play here.

The Finish Line

That's why if I were a holder of this stock, I would take my profits and "run."

Under Armour's share price has gone from the depths in 2009 of $6 to all-time highs of over $63 today. That's a 950% run. Astoundingly, it has gone up over 30% year to date!

To me, Under Armour seems like a company built on the "cool" factor. I'm not denying that Under Armour apparel is of good quality, has better technology than competitors, has a great marketing team, and even looks good. I can even foresee a few quarters where this spruces sales further.

But here's a not-so-secret tidbit about Under Armour. The company touts its great technological innovations that set it apart from its competitors. This may be true for now – however, none of these innovations are patented.

The fact is anybody with deep-pockets (Nike, Adidas etc.) can swoop in and really put pressure on Under Armour's core business.

In the short term, Under Armour is a strong, vibrant and cool brand that will attempt to carry that strength into the tough global environment. In the long term, though, I don't believe that technological advantage will hold and Under Armour will have to rely on quality and value.

Currently, Under Armour is perceived as an innovator through its fine marketing. But no amount of sharp marketing can make me buy this one right now.

I am a SELLER of Under Armour.

[Editor's Note:If you have a stock you would like to see us analyze in a future issue, leave us a note in the comments below and we'll add it to our list.]

About the Author: David Mamos brings nearly 15 years of analytical experience to the table with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation and execution of trading strategies for aggressive investors.

This is probably a good short play. I did a quick analysis on this company myself. The P/E is 65. The equity per share is $7.75 and yet it is trading at $60.24. If you bought this entire company today, based on its current price and earnings, it would take you 65 years to pay for the company. And if the company was liquidated today, you would be lucky to get $7.75 for each share that you paid $60.24 for. Why people continue to invest in companies like this is beyond my understanding.

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